Please ensure Javascript is enabled for purposes of website accessibility

Why Seadrill, Schlumberger, and Noble Stocks Cratered in December

By Reuben Gregg Brewer - Updated Apr 15, 2019 at 4:25PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Falling oil prices sent shares of these companies south.

What happened

December was brutal for Noble (NEBLQ), which plunged 37% according to data provided by S&P Global Market Intelligence. It wasn't the only drilling services stock to see a steep drop, however, as Seadrill (SDRL) lost 28.5% and Schlumberger (SLB -0.03%) fell 20%.

Check out the latest Schlumberger earnings call transcript.

So what

These declines, though, aren't exactly a surprise when you look at the bigger picture. In the last months of 2018, oil fell into a bear market, with a swift and painful decline that rapidly wiped out months of steady price gains. That, in turn, led to major slumps in oil stocks from diversified international giants like ExxonMobil, which fell around 14% in the month, to small fry like U.S.-focused Denbury Resources, which lost 24% of its market value in December.

An offshore oil drilling platform

Image source: Getty Images.

The big fear driving oil company stocks lower was that falling oil prices would lead to lower revenue and earnings. The concerns leading to the big drops at Noble, Seadrill, and Schlumberger were basically the same, but of a second order. When oil companies' top and bottom lines falter, they retrench in an effort to preserve financial strength and live within their means. That usually means cutting capital spending.

Oil company capital spending is what drives the top and bottom lines of drilling services stocks. So the drops at the drillers isn't a surprise and is, in the end, a result of falling oil prices. But there's another factor to examine here. Schlumberger is diversified across the drilling space, with both offshore and onshore operations. Noble and Seadrill are focused on offshore drilling services. There are notable differences in the dynamics impacting the offshore and onshore markets.

For example, the U.S. onshore space has been a major wild card in the oil industry in recent years, with a buildup in drilling activity materially altering the historical dynamics of the energy sector. Perhaps one of the most important factors is the speed at which U.S. onshore drilling can be ramped up and down. When prices fall, oil companies pull rigs from the field, and as soon as oil prices start to pick up again, drilling activity usually starts to recover. Industry watchers believe this has kept a lid on oil prices.

So while having onshore U.S. operations is both a benefit and a negative, it means that Schlumberger will likely see customer demand return more swiftly than Noble and Seadrill. This is because offshore drilling typically requires huge up-front commitments of both money and time -- once you start a deepwater oil project, you can't really just stop if oil prices decline. Thus, when oil prices hit the skids, there's a big fear that the massive, multiyear projects that underpin offshore drillers' top and bottom lines simply won't get underway, which is likely why the offshore-focused service providers took the bigger hit in December.

There are further nuances, as well. For example, Seadrill, which recently emerged from bankruptcy, had made a decision to focus more on shorter-term contracts. It likely expected oil prices, and thus what it could charge for its drilling rigs, to continue moving higher. That effort backfired in the near term, making it look like management failed to lock in better rates while it could. Noble, meanwhile, is carrying a heavy debt load that makes any downturn sting just a little more. All of these factors aside, however, it was still the price of oil that was the major catalyst in December.

Now what

Oil prices are volatile. That's not new information, it's just a statement of fact. What is different in the oil industry today is the impact of U.S. onshore drilling, which has shown an ability to rapidly adjust to the ups and downs in oil prices. That's changed some of the long-term trends in the industry, particularly when it comes to oil companies making massive, multiyear commitments to drilling projects. For drilling services companies like Schlumberger, Noble, and Seadrill, an already volatile industry appears to be getting more complicated.

Reuben Gregg Brewer owns shares of XOM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Schlumberger Limited Stock Quote
Schlumberger Limited
$37.12 (-0.03%) $0.01
SeaDrill Limited Stock Quote
SeaDrill Limited
Noble Corporation plc Stock Quote
Noble Corporation plc

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.